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Thursday, August 30, 2012

I’m taking a brief Labor Day break, with one eye on my computer and smart phone. In the absence of breaking news related to Dimock or the New York SGEIS, you might not hear from me for a few days as I catch my breath in anticipation of a busy September, which includes keeping up with the shale gas story and a week-long book tour that takes me to points in Pennsylvania, Ohio and upstate New York.

In the meantime, I offer this report from WSKG’s Matt Richmond. Matt follows volunteers testing water quality in the rivers of New York’s Southern Tier in anticipation of shale gas development. By establishing pre-industry baselines with empirical data, impacts on watersheds can be measured over time. The long-term project would offer field data rather than speculation and modeling. As one volunteer notes: “Catastrophes are not really hard to spot, we know when there’s been an explosion or a big spill.” Less easy to track are cumulative impacts that happen subtly, but which can push natural systems beyond ecological tipping points. With more than 70,000 miles of streams in New York, the volunteers, lead by the Sierra Club, have their work cut out for them.

Tuesday, August 28, 2012

New York policy makers are reportedly putting the finishing touches on guidelines that will give drillers access to New York’s share of some of the world’s biggest natural gas reserves. The final version of the Supplemental Generic Environmental Impact Statement (SGEIS) is going to be released in coming weeks. We know that because Governor Andrew Cuomo told us we can expect it by summer’s end… Unless it comes after that.

That sounds hazy, because it is. The future of shale gas development in New York depends on the status of the policy document that has been in a state of incompletion and transition since Cuomo’s predecessor, Governor David Paterson, ordered it more than four years ago. Deadlines have come and gone, while expectations and related tensions have grown more intense.

To predict the future, it’s worth looking at the past, and here the record shows ambivalence in Cuomo’s approach to permitting the controversial method of high volume hydraulic fracturing to extract gas from bedrock. Soon after he took office in 2011, Cuomo appeared to be ready to move ahead by setting the first hard deadline for the release of the second draft of the SGEIS: July 1, 2011. When the date arrived, his DEC -- working under an avalanche of public criticism aimed at the original drafts of the plan that still needed to be processed and addressed -- released a partially completed version. DEC Commissioner Joseph Martens promised the rest of the plan would be shortly forthcoming. He also announced the formation of a panel charged with finding revenue to fund the added regulatory wherewithal the DEC would need to oversee the industry. At that time, July 2, 2011, Martens told the press that permits could go out by early 2012.

As they say in storybooks, winter turned to spring, and spring to summer. The second version of the plan was completed and sent back to the drawing board with another flood of public criticism. Meanwhile the advisory panel that Martens assembled remained inexplicably inactive. Then, in June, the Cuomo administration leaked information to the New York Times in a story widely characterized as a “trial balloon.” Times reporter Danny Hakim, citing unnamed sources, reported that the state DEC would begin issuing shale gas permits within designated communities in the Southern Tier, over the most promising part of the Marcellus, as part of a three-year pilot project. Permitting could then proceed elsewhere when fracking was deemed safe. (I have since reported more details of the plan here.)

Last month, Cuomo told WXXI’s Karen DeWitt that the plan would be finalized “later this summer.” If you count the end of summer as Labor Day, the WXXI report squares with a report by Times Union columnist Fred LeBron, who, like Hakim, also cited unnamed sources to convey the news that Cuomo would be issuing a plan “before Labor Day.” If you count the end of summer as Sept. 21, then this squares with an August 19 CBS report, also citing unnamed sources, that the final SGEIS would arrive “after Labor Day.”

In my assessment, “after Labor Day” can mean a lot of things, and the vagueness of the report does not inspire confidence. Neither do my own unnamed sources, who once told me to be on the lookout for the SGEIS before Labor Day, and now are telling me it will likely be after Labor Day. I don’t count these sources as unreliable. I think they reflect the uncertainty of Cuomo himself, compounded by pressure on the DEC, hobbled by a lack of resources, to produce an air-tight review that is bound to face legal challenges.

The prolonged ambiguity of Cuomo’s approach to shale gas is telling, and a marked contrast to the approach from governors of neighboring states that also sit over substantial shale gas reserves. Pennsylvania governor Tom Corbett and Ohio governor John Kasich have touted the industry as a primary economic engine. Unlike his counterparts in Ohio and Pennsylvania, Cuomo has largely avoided the topic of shale gas, much less used it to stoke political support in his campaign for office in 2010, or anytime since.

When Cuomo talks about shale gas now, if at all, it’s in the context of allowing it in communities that want it, and banning it in communities that don’t. It’s a concept known as “home rule,” and it runs counter to the idea that the state, not towns, is responsible for overseeing the industry. He seldom brings it up publically unless pressed by reporters. He told DeWitt in July that home rule would have to be a consideration and added, cryptically, “if you go down this road at all.”

For a look at the differences between New York and neighboring states (at the risk of oversimplification) I consider two cultural icons: Red Adair and Erin Brockovich. For some, the culture and history of on-shore drilling-- personified by wildcaters, roughnecks, and risk takers—is infused with romantic appeal. Think John Wayne, who famously portrayed Red Adair in Hellfighters – an old-fashioned tale of macho folk heroism and adventure overcoming sensational danger with a happily-ever-after ending. It’s a naively simple tale from a bygone era that lingers deep in the American psyche. Republican leadership in both Pennsylvania and Ohio, motivated by enticement of wealth rather than fear of risks, are gung ho over shale gas development as a kind of rebirth of the old American economy. I put them in the John Wayne camp.

Fitting the cowboyesque drilling culture industry into New York, by comparison, has been an awkward political exercise from the get go. Full-scale development of the Marcellus and Utica shales would involve, at the very least, unprecedented land-use transformation in areas yet unblemished by scars of mineral extraction. Under current exemptions from federal hazardous waste and disclosure laws, it would likely carry a much higher price of unregulated industrialization. Here, Erin Brokovich, (a non-fictional character played by Julia Roberts) would be an apt personification of the attitudes shaping the anti-fracking movement. In the movie named after the heroine, Brokovich is an impoverished and multi-tasking single mother fighting the forces of greed and duplicity to uncover corporate exploitation – specifically the clandestine and catastrophic disposal of toxic waste -- at the expense of the common folk. (Brockovich, like Adair, is a plain-speaking folk hero with a knack for cutting through bureaucratic BS. Like Hellfighters, Erin Brockovich is based on a true story, and it too has a happily-ever-after ending.)

Of course, the dynamics of shale gas politics is far more complex than that. New York state has a history of land preservation in the Finger Lakes, Catskills, and Adirondacks (among other places) and an economy and politics heavily influenced by diverse downstate interests, not mineral extraction. Add to this the anti-fracking movement, a natural gas market glut leading to low prices, and a recent Siena poll showing New Yorkers split on shale gas development (with many undecided), and you have the conditions for political malaise in the governor’s office. You don’t have to read between the lines to see that the uncertainty that has held back New York’s fracking commitment from the beginning is unlikely to disappear once the SGEIS is released.

Predicting the outcome of the SGEIS also involves reading the positions of a diverse lot of administrators who serve as the governor’s advisors. Their backgrounds do not suggest a simple unifying view on the shale gas question. Before becoming head of the DEC, Martens was an environmental activist and land-preservationists who held leadership positions with both Catskill Mountain Keeper and the Open Space Institute – organizations that hold missions contrary to shale gas development. Cuomo’s Deputy Secretary for Energy and the Environment, Robert Hallman, has said the administration sees natural gas as a step toward cleaner energy. Larry Schwartz, Cuomo’s secretary, played a role in the shale gas discussion when he served as Paterson’ secretary. He (unsuccessfully) advocated a speedy resolution to the SGEIS draft in 2009, and he fired DEC commissioner Peter Grannis in 2010 after a memo was leaked from Grannis that suggested the DEC, decimated by cuts, would lack the ability to effectively regulate.

Cuomo undoubtedly has been thoroughly briefed on the SGEIS, and he has developed a plan now undergoing finishing touches to be released in coming weeks or maybe months. But I’m not sure laying the groundwork that could turn New York into a major mineral extraction state – with unknown environmental consequences -- currently fits his political comfort zone. I have said in a previous post that if he is serious about keeping the option open for a presidential bid, he will not, in the current national political climate at least, want to be labeled by opponents as the guy who closed the door on domestic energy production. Whenever the press release comes from the DEC announcing the release of the SGEIS, I have a feeling that it will include contingencies factored into a political calculation that will inevitably buy New York state more time to test the political winds locally and nationally.

Wednesday, August 22, 2012

The viability of shale gas production in New York may hinge on a critical policy question: Will chemicals regulated as hazardous material when shipped to well sites and injected into the ground be regulated as hazardous waste when they flow back out?

This question cuts to the crux of risk analysis of high volume hydraulic fracturing – a process that injects chemical solutions into well bores under high pressure to fracture bedrock and release gas. The process – commonly known as slickwater fracking -- is exempt from federal hazardous waste laws that require stringent handling, tracking, reporting, and disposal requirements for certain chemicals under the “cradle to grave” protocol spelled out in the federal Resource Conservation and Recovery Act. Because of the RCRA exemption, drilling waste is classified under the less stringent rubric of industrial waste or solid waste, therefore making it easier to dispose of or recycle by conventional means. While the exact chemical formulas for fracking a given well are proprietary, the New York State Department of Environmental Conservation lists the broad universe of fracking chemical families – many of them hazardous substances -- in a draft of the state’s permitting policy, called the Supplemental Generic Environmental Impact Statement (SGEIS). The list includes several hundred compounds – such as trimethylbenzene and acetone -- discussed in Section VI, page 6-16 under “Hydraulic Fracturing Additives” and itemized in Tables 5.7, 5.8, and 6.1.

I reported last week that several environmental groups have been verbally briefed on the latest version of the state’s plan to begin permitting shale gas wells, and during these briefings DEC officials told representatives of the groups that the state was bound by federal hazardous waste exemptions for the drilling industry. I put the question directly to the DEC. Are the federal drilling industry exemptions mandatory for states that want to make tougher laws? Agency spokeswoman Emily DeSantis replied in an email Monday: “We believe the law is unclear.”

The agency’s response is unsatisfactory to some well-healed environmental groups urging the state to close the hazardous waste loophole. Kate Sinding, a senior attorney with the National Resources Defense Council, sees no ambiguity. “I wanted to share with you NRDC’s legal analysis of the question whether DEC has the authority to regulate fracking waste as hazardous waste,” she wrote in an email last week. “Our conclusion, in a word, is yes.” In a follow-up conversation today, Sinding added “This industry gets a pass that no other industry enjoys. We will keep hammering the point that it (closing the loophole) makes a lot of sense.”

But even if the state has the legal authority to close the federal exemption for operators in New York, that doesn’t mean it will be compelled to do so. No other states have attempted to exceed the federal regulatory framework for drilling waste disposal, and any attempts by New York to raise the regulatory bar would face strong opposition from the industry. Tom West, an industry lawyer, said taking away the federal hazardous waste exemption in New York could hypothetically be done with the appropriate rule-making process, including public input, but there was no reason for it. Drilling waste, according to West, “has never been found to be a problem,” and closing the exemption would be a “scarlet letter” that would effectively discourage the industry from operating in New York.

West’s assessment contradicts information documented in a report by the NRDC that includes a list of toxic substances found in samples from drilling wastewater. They include varying concentrations of benzene, toluene, xylene, volatile organic compounds, heavy metals, and radionuclides. The list is itemized in Table 1 of the report, titled “In Fracking’s Wake: New Rules are Needed to Protect Our Health and Environment from Contaminated Wastewater. “ (The report is one of several position papers the NRDC has published that characterize the agency’s regulatory approach to the fracking, including full disclosure of fracking chemicals.)

Other reports highlight risks from a lack of controls for fracking waste disposal. A statistical analysis published in this month’s the journal “Risk Analysis” found the disposal of fracking waste to carry higher risks to water supplies, by several orders of magnitude, than pollution from other pathways. Risk factors include “epistemic uncertainty associated with hydraulic fracturing wastewater disposal,” according to the study by Stony Brook University authors Daniel J. Rozell and Sheldon J. Reaven.

Gov. Andrew Cuomo has said the state DEC is expected to finalize its permitting guidelines “by the end of summer.” (That date remains a matter of speculation, as Cuomo continues to be vague with reporters attempting to pin him down, and he has added on more than one occasion that the DEC is not working on a specific timetable.) Still, the anticipation that a moratorium on the permitting of shale gas wells in New York will soon be lifted has spurred a rush of eleventh-hour activity by anti-fracking groups urging municipalities and the state to ban fracking. The modus operandi of grass roots groups, such as New Yorkers Against Fracking, includes protests, demonstration concerts, marches, petitions, and letter writing campaigns. The latest manifestation of this effort includes a three-day event in Albany scheduled this weekend. The event, called Don’t Frack New York, includes two days of “training and strategy sessions” for those pledging to be part of the anti-fracking movement, followed by a March on Albany on August 27. (Note corrected date: The original version of this blog incorrectly listed the event over the Labor Day weekend.) It is lead by high profile environmental activists including filmmaker Josh Fox, and authors Sandra Steingraber and Bill McGibben.

The most active grass roots fracking supporters, meanwhile, have been landowners eager to lease property to gas companies, while believing the financial gains will lift entire communities out of economic doldrums. Sometimes backed by local business groups and law firms, they have formed coalitions campaigning on behalf of the industry with tools ranging from bumper stickers and road-side placards to a movie of their own, produced by the industry trade group Energy In Depth, called Truthland. The drilling industry has also been active through lobbyists, including West, through advertising in print and media, and trade groups, such as Energy in Depth, who have been going head to head with the anti-fracking movement in a war of words waged on list serves, blogs and forums.

While the anti-fracking grass roots groups have been conspicuously public with their posters and marches, institutional environmental organizations such as the NRDC and Earthjustice have taken a lower profile while waiting for the state to complete its review. While the NRDC operates globally on an annual budget that exceeds $100 million, the agency’s stance on fracking may be shaped by the controversy that is center stage in New York. The NRDC has pushed for regulations to control fracking, but that approach has drawn criticism from grass roots organizations in New York that are seeking nothing short of an outright ban. New Yorkers Against Fracking – which has argued that the state’s review process fails scientific muster in evaluating the risks and impacts of fracking – has criticized NRDC for suggesting the state consider a plan to begin fracking on a trial basis in certain parts of the state while prohibiting it in others. The plan was included as one of many considerations itemized in NRDC’s response to the SGEIS.

It’s noteworthy that the NRDC’s New York state web page now features The Sky is Pink, a film by Josh Fox (producer of Gasland) that urges Governor Cuomo to ban fracking. NRDC’s alliance with Fox and his work highlights the amorphous and evolving position main stream groups have taken on the issue. The Sierra Club once accepted millions of dollars from Chesapeake Energy as it built a campaign that included promoting natural gas as a bridge fuel from coal to renewable energy. It changed its position as the anti—fracking movement showcased the risks of fracking, including threats to water supplies and a culture and history of non-disclosure and exemptions.

A hazardous waste classification could be a strong and perhaps insurmountable deterrent to fracking in New York. The classification would apply to the flow-back from each well – typically several million gallons, times tens of thousands of wells potentially drilled in the state. The more stringent handling and disposal laws would make it much more difficult for the agency to get rid of the waste by re-injecting it into the ground, shipping it to non-certified landfills, shipping it out of state, or passing it through conventional treatment systems for re-use or discharge.

In briefings with environmental groups, the DEC has shared ideas under consideration to regulate the industry. They include on-site inspections and water monitoring wells around gas wells. Also under consideration is “green completion,” which would require pipeline infrastructure built in advance of drilling. Green completion would reduce risks associated with leaks and discharges – including emissions from flaring -- from pressure building in wells that are freshly producing but yet to be tied into pipelines.

According to West, green completion would be unworkable and onerous to shale gas development in New York, which, due to the moratorium pending the completion of the SGEIS, has not advanced past an exploratory phase. “I think it is a show stopper,” West said. “You have to allow it to happen and adjust as you go.”

Thursday, August 16, 2012

A group of residents of Dimock Pa. have agreed to a settlement with Cabot Oil & Gas related to polluted water supplies blamed on nearby Marcellus Shale drilling operations.

As reported by Laura Legere in Wednesday’s Scranton Times Tribune, Cabot has reached verbal agreements with 32 of 36 Dimock households while continuing to negotiate with remaining families. Legere cites a July 25 conference call between Cabot CEO Dan Dinges and investors. According to a transcript of that call posted by Seeking Alpha, the cost of the settlement to Cabot was immaterial. Dinges told investors:

The aggregate value of the settlements are not a material item with respect to Cabot's financial statements. Resolution of this litigation will have a very positive impact on G&A going forward due to the reduction in cost of defense.

Cabot spokesman George Stark was not immediately available for comment.

Terms of the deal were sparse because residents and the company were bound to a clause that prevents them from discussing details. It’s a quiet ending to what has been a contentious and public fight by some residents to hold Cabot accountable for pollution affecting their water wells.

Today, I spoke with several of the residents who agreed to Cabot’s terms, and who are now waiting for their checks to close the deal -- an administrative process that may take months. One third of the sum will go to attorney’s fees, and an undetermined amount to expenses. My conversations reflected a group of plaintiffs who were conflicted, battle weary, and resigned to accept the deal on the advice of their attorney, Tate J. Kunkle, of the New York-based law firm Napoli Bern Ripka Shkolnik. The new offer did not include systems to restore their well water, which was a point of regret for some of them.

It's been a battle that “sucks the life out of you,” said Victoria Switzer. “I’ll be 60 soon, and I don’t want to spend the next decade of my life going through this.” As recounted in the narrative of Under the Surface, Switzer tried unsuccessfully to resolve problems directly with Cabot by enlisting community groups and public officials. She signed on to the lawsuit as she became frustrated with the company’s unresponsiveness to residents’ requests for water. During subsequent public appearances, she coined the term “accidental activists” to sum up the situation she and her neighbors found themselves in.

That group included Ron and Jennie Carter, second generation farmers and natives of rural Susquehanna County who signed a drilling lease with Cabot in the hopes of generating retirement income. They received royalties that did that, but they didn’t anticipate losing their water well, or becoming embroiled in a consuming legal battle. “I have never been involved with attorneys before, and I hope I never will again,” said Ron Carter. “I hope when this is settled, it’s settled.”

The Carters and other Dimock residents were largely supportive of gas drilling when it began in 2008. Many became disillusioned after explosions and spills lead to problems that eventually divided the community into factions siding with and against Cabot.

Dimock represents both the dreams of Small Town USA and a loss of innocence amid the rush to embrace the lucrative promises of on-shore drilling. The town in rural northeastern Pennsylvania, just south of the border with New York state, became both a catalyst in the national anti-fracking movement, and a narrative line for books and films. In addition to Under the Surface, the stories of Dimock residents were featured from varying perspectives in works ranging from Gasland, Josh Fox’s academy award nominated movie, to Seamus McGraw’s memoir End of Country, as well as numerous magazine pieces and international news reports.

The conflict began on January 1, 2009, with the explosion of a well that supplied water to the home of Norma Fiorentino, a plumber’s widow and great grandmother. A subsequent investigation by the Pennsylvania Department of Environmental Projection found that methane was seeping from nearby drilling operations into an aquifer that supplied Norma’s well and others along the Carter Road area. Cabot contested the findings after the DEP, under Governor Ed Rendall’s administration, determined that the aquifer was permanently damaged from methane migrating from the bores of nearby gas wells. The DEP ordered Cabot to build an $11 million water pipeline to supply affected homes.

That order was lifted shortly after Tom Corbett won the gubernatorial election in November, 2011. As part of an agreement to drop the pipeline mandate, Cabot agreed to offer 19 families with excessive methane levels in their water wells twice the assessed value of their homes and a treatment system to remove the gas from their water. Some residents accepted that offer, but most declined while pursuing an independent lawsuit against Cabot filed in December of 2010. The lawsuit involved 15 families at the onset, but others joined later.

The story took a twist when the federal EPA intervened in January. The EPA began sampling water from 64 homes after the federal Agency for Toxic Substances and Disease Registry reviewed existing sampling data from Dimock wells by the Pennsylvania DEP and Cabot. The federal agency found “a possible chronic public health threat based on prolonged use of the water from at least some of these wells.” After a seven-month follow-up investigation, the EPA concluded last month that water wells supplying five of 64 homes contained elevated levels of methane, arsenic, barium, and manganese, but filters installed on the systems would eliminate health risks.

The recent settlement may mark the end of a chapter for some, but a handful of residents are resolved to continue the fight. Ray Kemble did not sign the agreement because he dislikes terms set by both his attorneys and Cabot's, according to Legere’s report. He noted that the agreement would limit what he can say publicly, adding that he would have to remove a sign in his yard that said "Make Cabot Pay."

Wednesday, August 15, 2012

Recent data show Marcellus daily production soaring, with gas coming online faster than markets can absorb it. As the AP’s Kevin Begos reports, the combined output from Pennsylvania and West Virginia wells in July was about 7.4 billion cubic feet per day. That’s grown from 3.6 billion feet in April, 2011, and from 4.6 billion feet in August of last year. In his August 5 story, Begos cites Bentek Energy analyst Kyle Martinez as a source of this information. (In search for access to the data, I spoke with Kyle Tuesday and learned that he calculates projections from raw metering data. The U.S. Energy Information Association, which uses Bentek data, has yet to compile an online summary of Bentek’s most current assessment, but it does have a summary to data from August 2011 that supports the trend, which can be found here.)

With this kind of output, as Begos points out, the Marcellus is poised to surpass the daily production of the Haynesville formation, straddling parts of Louisiana, Texas and Arkansas, to become the top producing gas field in the country. Now questions are less about the production capability of the Marcellus (at least over the short term) and more about where all this gas coming on line will go. Will a nationwide glut keep prices suppressed to the point where extraction loses its economic luster or even drive operators to a fiscal breaking point? Or will market forces divert the flow of this domestic bounty to places like Europe and Japan, where gas prices are four times greater than they are in the U.S.? Or will domestic markets begin to open with projects such as a petrochemical plant proposed by Shell Oil in southwestern Pennsylvania, conversion of coal fired power plants nationwide, or natural gas powered vehicles? The daily production numbers that provide the hook to Begos story also represent a compelling gauge of Marcellus prospects for investors. They provide a snapshot that supports a broader sense that the play has been proven. But there is far more to it than that, in the Marcellus region and in other shale gas regions nationwide and globally.

Surging Marcellus production is partly a function of the number of wells drilled, and in this regard its geography is as important as its geology. The location of the Marcellus in proximity to the world’s largest markets in the mid Atlantic and northeast is a factor that cannot be overstated in accounting for its popularity. Compared to gas plays such as the Haynesville in the Gulf, the much lower cost of getting Marcellus gas to market provides a major incentive to drill. That’s the way it stands now, anyway. But day-to-day figures can change dramatically with market dynamics over the course of years; and keep in mind that it will takes decades for the Marcellus, or any other shale play, to reach maturity. (Considering something the EIS calls “proved reserves” the Haynesville versus the Marcellus equation looks very different. In 2010 the Haynesville was credited with more than 24 billion cubic feet of “proven” reserves, compared to 13 billion of the Marcellus. It will be interesting to see the 2011 figures when they are available. See table three in this EIA report U.S. Crude Oil, Natural Gas, and NG Liquids Proved Reserves.)

Judging the amount of gas coming from the ground is one thing, judging it’s worth is another. Projecting the future of a given shale play is far trickier than evaluating its past, because it involves reading the push and pull of present and future market dynamics. Bit there are some very big telltale signs that are worth watching closely, and they involve the tens of billions of investor money big energy companies are committing to projects to develop natural gas markets both domestically and overseas.

Sempra Energy officials have announced a $6 billion liquefied natural gas export terminal at the company’s existing import terminal at Hackberry in southwestern Louisiana. Meanwhile, two multi-billion export projects are on the drawing board in Los Angeles California: Cheniere Energy Partners has secured $5.4 billion to begin modifying its import terminal at Sabine Pass in Cameron Parish for exports; and Energy Transfer Equity LP is planning an export facility at its import terminal at Lake Charles, La. These plants which now sever as import terminals will chill natural gas into a liquid that can be shipped on tankers. As these plans take shape, you may see market incentives to develop shale gas plays closer to the Gulf and Pacific Coasts, which may turn the tables on the geographical advantages the Marcellus now holds. These projects may also face significant long-term political opposition. Exporting has significant drawbacks by saddling areas with the problems associated with extraction without related economic gains. (This is known in economic parlance as “the resource curse,” referring to the paradox of regions or countries with poor economies based on the export of an abundance of non-renewable resources such as minerals and fuels.)

There are also plans to capitalize on the market glut from the Marcellus in the Mid-Atlantic states. One high profile project is a $4 billion petrochemical plant by Shell Oil Co. in southwestern Pennsylvania. The plant, proposed for Beaver County, would use shale gas as both fuel and feedstock for products at the core of the U.S. consumer economy, including fertilizer, textiles, packaging material, and plastics of all sizes and shapes. Economically, this is a good alternative to exporting resources, but there are questions about the size of the public tax subsidy Shell is demanding (now at $1.65 billion) and the degree to which the petrochemical plant will spur growth of other regional business.

Development of both the Shell plant in Pennsylvania, and gas export facilities in the Gulf and the Pacific Coast are still years away. But the fact they are being embraced by capital forces with wherewithal to summon the kind of investment to influence global markets is something to be taken into consideration. While many people are eager to assess the industry based on production figures and policy debates unfolding on a daily basis, it’s important to consider this long-term picture. Big Energy has always adapted to volatile market forces while controlling markets and investment over the course of decades. But there is a factor that they have little control over. In the case of the on-shore drilling boom – enabled by the recent technological marriage of fracking and horizontal drilling – future projections are dependent on a key unknown: How long will each shale gas reserve produce?

While daily production may be booming one year, it can taper dramatically in subsequent years, especially with shale gas wells. The rate at which a given well produces gas over time – both actual and projected -- is called a decline curve. Decline curves attempt to relate initial production rates (IP) with long-term production and ultimately recoverable reserves (URR). Decline curves help operators determine what they can expect out of the well over decades, and calculate things such as the amount of re-fracking and related expenses a given well will require to keep it flowing. Interpretations and analyses of decline curve projections for shale gas vary greatly. (For more on the problems associated with projecting decline curves, check out Greg McFarland’s "Shale Economics, Watch the Curve," or Mike Markes’ “Does I.P. Mean Investor Problems?” Both evaluations are in the Oil & Gas Evaluation Report.)

Perhaps one of the greatest examples of the uncertainty of this kind of analysis is the discrepancy between figures provided by the most trusted industry sources to answer a question that is the starting point of all long-term projections: How much recoverable gas is in the Marcellus Shale? As recently as 2010, the U.S. Energy Department estimated the Marcellus held 410 trillion cubic feet of recoverable gas – a projection based in part of the work of Terry Engelder, a Penn State Geologist who became famous for his study of the Marcellus. In August of last year, the federal government cut its estimate of undiscovered Marcellus Shale natural gas by as much as 80 percent after an updated assessment by the United States Geological Survey. Prior to Engelder’s work, the USGS estimated the Marcellus contained only 2 trillion cubic feet. Subsequently, the USGS had revised its estimate to 84 trillion cubic feet – far more than the its original estimate, but far less than Engelder’s calculation, which was close to 500 trillion cubic feet.

While the uncertainty caused by differences between these projections is a lot, it’s nothing compared to the noise in the system introduced by commercially and politically derived hype. A recent notable example is Ohio Gov. John Kasich's claim that a single energy company could recover $1 trillion worth of oil and gas from the state's (largely unexplored) Utica shale reserve. AP’s Julie Carr-Smyth put this outsized claim into perspective: At current oil prices, that figure represents more than four times U.S. oil production last year. Viewed another way, every drop of oil produced in America for the next four years will be worth roughly $800 billion, based on current prices and production rates. (Arthur Berman, a Texas-based petroleum geologist and independent energy consultant, told Smyth "My best estimate is he’s probably wrong by a couple of zeroes.")

How long will shale gas be viable and what will be the cost of future extraction when factoring in social and environmental factors? That sort of question is keeping more than a few policy makers and politicians very busy. It’s a question that extends beyond daily production values. Ultimately, the answer will determine the legacy for the next generation.

Thursday, August 9, 2012

This just in, for those tracking who's who in New York’s epic shale gas story, and where they are now.

Effective August 20, Stuart Gruskin will become the Nature Conservancy’s chief conservation officer and liaison for external affairs for New York state.

Those familiar with the history of the Great Fracking Fight in the Empire State will remember the role of Stuart Gruskin, who served as deputy DEC Commissioner under Governor Paterson’s administration. As chronicled in Under the Surface, Gruskin was on the front line of the contentious community debates that spawned the state’s monumental policy review, the Supplemental Generic Environmental Impacts Statement (SGEIS), which in turn was a catalyst for the ensuing grass roots anti-fracking movement that would eventually go nationwide. Gruskin left the agency after his boss and mentor, DEC Commissioner Peter Grannis, was fired near the end of Paterson’s tenure in 2010 for insubordination after leaking a memo detailing how thin the agency was being stretched. Gruskin, a supporter of Grannis, has also remained a staunch supporter of the DEC ‘s handling of the controversial SGEIS. (Grannis now serves as the state’s deputy comptroller under Tom DiNapoli.)

The Nature Conservancy is a global conservation agency. Grusk will represent the Conservancy’s interests in conservation, public funding, public land management, and natural resource policy in New York state.

Wednesday, August 8, 2012

On Monday, I posted that representatives from the New York State Department of Environmental Conservation were presenting environmental groups with aspects of Gov. Andrew Cuomo’s plan to begin shale gas development in New York. I have since learned more about the plan from sources who have been briefed on it. These details were presented as conditions “on the table” to allow permitting of initial wells, with the final outcome still a work in progress. It’s worth keeping in mind that the Cuomo administration briefed environmental groups on these points in the wake of criticism that the DEC was working too closely with industry to develop the plans. It’s also worth noting that these ideas have been presented to environmental groups verbally but not in writing, according to my sources. Here's a summary of some major points.

Timing and location: Permitting could begin later this year – pending some legislative unknowns that I will discuss in a minute. As previously reported, a ramp-up phase of 50 wells or less for the first year would begin in Broome County and adjoining counties along the Pennsylvania border, which overlie some of the richest parts of the Marcellus Shale. The first wells would likely be cited in areas closest to the Millennium Pipeline.

Green Completion: Before new wells are hooked up to the grid, gas is commonly vented or burned off in a process known as flaring to release excessive pressure in the well bore that can cause methane migration and other problems. The DEC plan would require that gathering pipelines and processing systems be in place before initial wells are completed. This would reduce emissions by minimizing the need to vent excessive pressure building in wells waiting to be tied in to the system.

Monitoring wells: During the initial ramp up, three monitoring wells would be required around each gas well. These wells would provide comprehensive analytical data to track changes in the ground water. Essentially, this requirement would go a step further than the groundwater baseline testing offered in the current plan.

Inspection: DEC staff would have to complete 13 on-site inspections during the permitting and drilling of each well.

Waste classification: Although the industry uses classified hazardous materials in fracking solutions injected into the ground to stimulate gas flow, the waste that flows back out is exempt from federal hazardous waste laws. Therefore, it is not subject to the handling, tracking, and disposal requirements that govern hazardous waste. State laws are subject to a national exemption for the industry, so there is no way around this, according to the DEC interpretation. The DEC is requiring a closed loop system for some aspects of the operation, which means fluids will be stored in tanks and some of it “recycled” based on the industry needs and discretion; but there is no technical definition for “recycling” or ways to effectively measure this. Accounting for how much waste will be produced, and where it will end up, remains a major issue for environmental groups, and likely grounds for a legal challenge to the state’s plan once it is finalized.

Public Comment: Permitting for each well would require a 15-day public comment period, but no public hearings.

Well plugging: There was some inconclusive discussion about requiring or providing incentives for operators to find and plug an orphan well before developing a new shale gas well. New York state has more than 1,400 abandoned, unplugged gas wells, and perhaps tens of thousands more undocumented. Wells are often abandoned when things go wrong, operators run out of money, or they are unproductive. The legacy of abandoned wells presents risks related to methane migration, and hazards for drillers who unexpectedly drill through them while developing a new well. Sometimes orphan wells cause near misses, as when Shell Appalachia accidently drilled through one in July, causing a methane geyser that was eventually brought under control. Other times they cause fatalities, as when an explosion in July 2008 killed a resident who tried to light a candle in the bathroom in Marion Township, Pa., The Pennsylvania DEP’s record of the event linked the explosion to gas migrating into the septic system from an old gas well with deteriorated casing.

Vertical versus horizontal wells: The new policy (outlined in a document called the Supplemental Generic Environmental Impact Statement or SGEIS) is being developed only for shale gas wells that use high volume hydraulic fracturing and horizontal drilling. It does not apply to conventional wells drilled vertically using 300,000 gallons or less of fracking fluid. Some environmental groups have pointed out that shale gas operators often use vertical wells (which can later be turned into horizontal wells) to begin exploring shale formations and to lock up lease holdings indefinitely. The shale gas era in New York could begin with conventional development by operators and speculators who want to prove up the play and set the stage for future development, even in zones (like the New York City water supply in the Delaware River watershed) where high volume hydraulic fracturing is off limits in the current political climate. This scenario is more likely if the price of gas rises to support this kind of exploration.

Funding: The DEC Commissioner Joseph Martens has said the agency will issue permits only at a rate that it can keep up with. So a small staff means a small number of permits. Still it remains to be seen how the agency will handle its new tasks of on–site inspections, permit processing, review of public comments, and reviewing and monitoring analytical results, even in the absence of problems. There will be more pressure on the agency facing an uptick in development as the price of gas rises.

Home Rule: The rights of local governments to ban shale gas development has been recently recognized by the New York State Supreme Court, which upheld local drilling bans in the towns of Dryden and Middlefield. New York State Environmental Conservation Law, however, states that local governments do not have jurisdiction over gas well development. It will likely take legislation to resolve this key inconsistency in the ongoing Home Rule. The state Assembly, controlled by Democrats, has passed a bill amending the conservation law to reflect local governments’ right to control drilling. The bill was not taken up by the Republican controlled Senate.

Health impact study: Technically, the Cuomo administration does not need to evaluate the impact of drilling on public health to go forward, but this is a big point for environmental groups. Democratic lawmakers have held up lack of a health impact study as a centerpiece to their opposition to shale gas development.

Another high-profile legislative sticking point is funding. The state DEC staffing has been cut, and there are no plans to add staff members to take on the tasks of permitting, inspecting, and overseeing shale gas development. I have heard from lawmakers and aides that a fight to fund increased enforcement would be “epic.” I will add one more word. Critical. The best regulations in the world mean little if there are no resources to ensure their enforcement.

The policy overhaul is now entering its fifth year, and the Cuomo administration is sending mixed signals regarding when it will be complete. DEC Commissioner Joseph Martens is using media opts to remind the public of the amount of work that needs to be done. Gannett’s Jon Campbell reported today that the state’s latest draft of the SGEIS has grown from 1,500 pages to 4,000 pages as officials try to reflect input from tens of thousands of stakeholders submitted during public hearings and comment periods. Cuomo has said on more than one occasion this year that a finalized SGEIS is imminent, and many have taken that to mean by the end of summer.

It is likely the Cuomo administration will not wait for all of these legislative issues to be squared away before he finalizes his permitting policy. If permitting begins, even on a limited basis, before issues of Home Rule and funding are resolved, it will signal the beginning of the shale gas development in New York and a plan-as-we-go approach. If they are held up for legislation, either by legal challenges from environmental groups (which are likely) or by Cuomo’s design, it may signal another indefinite delay. If Cuomo wants to open the door for a future presidential bid, he will want to avoid the label as the guy who kept the shale gas industry from New York. Passing issues onto the legislature and local municipalities to resolve is a strategy that may help him in the long run.

Monday, August 6, 2012

A plan by Gov. Andrew Cuomo to permit high volume hydraulic fracturing to develop vast shale gas reserves in New York state will rely on state lawmakers to resolve a host of unknowns, including funding for regulatory oversight, according to sources familiar with it.

The much-anticipated plan – more than four years in the making with several trips back to the drawing board in the face of public criticism – is expected by the end of summer after it’s reviewed by stakeholders, including environmental groups, according to sources. Permitting could technically begin within months after the state issues its final policy, called the Supplemental Generic Environmental Impact Statement (SGEIS). While it would take several weeks or months for operators to reapply for permits under the new plan, legal and legislative complications remain practical barriers to shale gas development in the Empire State, especially with a weak market and low prices dampening economic incentives to explore new areas in the near term.

Earlier this summer, Cuomo proposed beginning shale gas development on a trial basis in New York’s Southern Tier counties, which overlie the richest parts of the Marcellus and Utica shales. That plan would allow for permitting 50 wells in the first year in towns that approved of shale gas development. The plan, as reported by Danny Hakim of the New York Times, met opposition from activists, who said it would make impoverished communities guinea pigs for assessing risks of fracking, a process to extract gas from bedrock by injecting the well bore with a pressurized solution of chemicals, many of them toxic.

Yesterday, Times Union columnist Fred LeBrun wrote that environmental groups were reviewing the most recent version of Cuomo’s plan that will be formally released before Labor Day. The article, titled End of the Anti-fracking World Near states: “For those desperately hoping against hope that high volume, horizontal hydraulic fracturing for natural gas will be blocked from coming into New York state, sorry. For you, the end of the world arrives before Labor Day.” LeBrun explains that shale gas development would begin along lines that Cuomo had outlined previously, with no additional DEC staff members to oversee “the first run of wells,” and without substantive changes to regulate waste water removed from the sites.

I have since heard different assessments from anti-fracking camps familiar with aspects of the plan. Contrary to the thrust of LeBrun’s report –- that the Cuomo plan marks the beginning of the shale gas era in New York -- some anti-frackers see Cuomo’s approach as a victory because it ultimately depends on involvement from the legislature. A primary monkey wrench, according to anti-fracking activists, will be a battle over funding -– never a sure thing in Albany and subject to even more uncertainty when it comes in the form of a controversial issue in the hands of partisan lawmakers. One advocacy group, Gas Drilling Awareness of Cortland County, advised members on its website that Cuomo’s plan “requires budget and legislative action … in the next legislative session delaying a final decision into 2013.” As reported by Jon Campbell of Gannett, state estimates show the Department of Environmental Conservation will need to come up with an average of $20 million each of the next five years to regulate the natural gas industry.

Opening the door to permitting, even on a limited basis, would be a problem for Democratic lawmakers, said Assemblywoman Donna Lupardo, a member of the Assembly’s Environmental Conservation Committee. Lupardo also sits on a panel assembled by DEC Commissioner Joseph Martens to advise the Cuomo administration on funding and other issues related to shale as development, including the prickly point of assessing health impacts. The panel, which has been inactive, has questionable clout, and it remains to be seen whether Cuomo will move ahead without its input.

“There are a lot of issues that have to be worked out, and there are many of my colleagues who are not comfortable with fracking,” said Lupardo, who predicted the fight over funding would be “epic.” The Republican controlled Senate, on the other hand, is lead by fracking proponents, including Senate Deputy Majority Leader Tom Libous representing Brome County – an area designated as a starting point for permits. The Senate is in the position to block any attempts by the Assembly to ban fracking. Conversely, the Assembly can block any attempts to legislate funding and necessary regulatory pieces that could arise, depending on the approach Cuomo takes. The 2012 legislature session is over, but lawmakers could decide to reconvene in the event of shale gas developments. The legislative picture is further complicated by elections in November that could change control of the Senate.

The future of fracking in New York is also hinged to the idea of Home Rule, which cedes the decision to allow or ban shale gas development to town officials. New York’s Supreme Court (the state’s lower court) has upheld drilling bans in the towns of Dryden and Middlefield. The industry has filed a notice of appeal.

Still, there are scenarios where the DEC could begin issuing permits before other issues are resolved. The agency could finalize the SGEIS this year as promised by Cuomo, and begin issuing permits in areas designated for fracking on a trial basis, while leaving the courts and legislature to sort out funding mechanisms and the legality of Home Rule.

“We know that the legislature in this state is very dysfunctional, and it will would be very hard for him (Cuomo) to wait for them to do anything,” said Deborah Goldberg, an attorney for Earthjustice, an environmental advocacy group. “If he’s going to go forward, he’s going to go forward.” How events will unfold, Goldberg added, is still a matter of speculation.

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Under the Surface represents a kind of reportorial fracking, in which the indefatigable Wilber bores in to extract how the process has had an impact on the lives of those atop or near that gas. -- David Margolick, contributing editor, Vanity Fair, and author of Elizabeth and Hazel: Two Women of Little Rock

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With a journalist's command of the facts and a novelist's eye for his subjects, Tom Wilber takes us to the living rooms, farms, meeting halls, and mountain streams where the fracking drama plays out daily. -- John Cronin, senior fellow at Pace and Clarkson Universities and coauthor of The Riverkeeper

Wilber, a former environmental reporter who has been covering the fracking debate from the beginning, combines a storyteller’s ear with a journalist’s eye, offering a sensitive and especially timely take on the issue… This book will be essential background reading for the still-unfolding fracking drama. --Publisher's Weekly

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